Covid Variants Trump Earnings
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The following is an excerpt from this week’s ‘Weekly Market Letter’ from Market Edge (www.marketedge.com).
The major averages kicked off the start of Q2 earnings at record highs this week but soaring inflation data and spiking Covid variant cases around the globe trumped blow-out earnings. The Money Center and Investment Banks reported early in the week with JP Morgan Chase (JPM), Goldman Sachs (GS), Wells Fargo & Co (WFC), Blackrock (BLK), Morgan Stanley (MS) trading mixed on the results, while solid earnings from PepsiCo (PEP), Delta Airlines (DAL) and a jump in July Retail Sales, showed consumers were loosening the purse strings. Despite better than expected numbers, the stock market struggled as inflation numbers came in much hotter than estimates. June CPI jumped +5.4%, and PPI soared +7.3% YoY as the debate of whether inflation was transitory continued. Fed Chair Powell moved to calm investor jitters as he testified before the Senate Banking Committee and made it clear that the Federal Reserve was ready to move on rates. The committee will alter policy only if inflation is persistently on a higher path, noting that employment goals, were still a ways off. Rates retreated during the week and the yield on the 10-year Treasury fell to 1.299%, while the 30-year T-Bill slipped below 2% and settled at 1.927%. While gains in big cap technology shares propped up markets mid-week, spiking Covid variant cases caused investors to rotate into defensive sectors on slowing economic growth concerns ahead of the weekend. Crude oil prices tumbled after OPEC and Russia came to a production pact and Energy (XLE) was the worst performing sector down -7.89%. Consumer Discretionary (XLY), Materials (XLB), Financials (XLF) and Industrials (XLI) also helped lead the different indexes lower. As mentioned, defensive sectors outperformed, and Utilities (XLU) jumped +2.59%. Consumer Staples (XLP) and REITs (XLRE) also outperformed. The NASDAQ ended the period on a four-day skid and the major averages snapped a three-week win streak as they staggered into the weekend.
For the period, the DJIA fell 182.31 points (-0.5%) and closed at 34687.85. The S&P 500 gave up 42.39 points (-1.0%) and settled at 4327.16. The NASDAQ tumbled 274.68 points (-1.9%) to close at 14427.24, while the small cap Russell 2000 traded lower for a third consecutive week dropping 116.76 points (-5.1%) finishing at 2163.24.
Market Outlook: The technical condition of the market deteriorated this week, despite hitting new highs early in the period. Negative divergence in underlying breadth, the Russell 2000, DJ Transportation Index and now, the Philadelphia Semiconductor Index are signaling that the current rally is likely stalled over the near-term. The technical indicators for the DJIA and S&P 500 are mixed with MACD, a measure of the short-term trend, crossing into bearish ground for the Dow, while Momentum, as measured by the 14-day RSI, in neutral ground and slowing. The technical indicators for the NASDAQ finished the week with a negative slant, while the different indicators for the small cap Russell 2000, DJ Transportation Index and Philadelphia Semiconductor Index are all in negative ground but showing signs of being oversold. The Russell 2000 and transports are both trading below their respective 50 and 100-day moving average (MA), and the semiconductor index cracked below key moving average support at its 50-day MA on Friday. In addition, the Financial (XLF) and Industrials (XLI) sector ETFs are trading below their 50-day MA, while Energy (XLE) and Materials (XLB) fell below that level and broke secondary support as it traded below their 100-day MA. Underlying breadth continues to deteriorate, and the NYSE and NASDAQ Advance/Decline lines have declined for the last two weeks showing leadership in the rally is thinning and fewer stocks are participating. The number of new 52-week highs continues to contract and there were more new 52-week lows than new highs on the NASDAQ during the week. This negative divergence is usually a precursor to some type of market correction. Although investor sentiment has been somewhat reined in, there are still signs of excess exuberance. This week Investors Intelligence reported that Bullish Investment Advisors outnumber Bearish Investment Advisors 4:1. That is the highest Bull/Bear spread since early 2018. Furthermore, the National Association of Active Investment Managers Exposure Index hit 93.3, up from 70.9 three weeks ago. That indicates that professionals may be too complacent with the rally and could induce more selling if the major averages continue to struggle.
Although the major averages finished the period with minor losses, the signs that the rally has run out of steam continue to mount. Analysts are now projecting that earnings may have peaked in the Q2 and yields drifting lower may be hinting that the reopening trade may have run its course. With the current market rally the longest without at least a 5% correction in 35 years, investors should be cautious and remain defensive, keeping an eye on key moving average support levels. High liquidity, low rates and the Federal Reserve on hold, should limit downside here; however, surging coronavirus cases may be the biggest threat to the stock market here and investors shouldn’t ignore the market’s mixed signals.
A chart of these indicators can be found by going to the Market Edge Home page and clicking on Market Recap, which is on the right-hand side of the page just below the Second Opinion Status numbers.
Cyclical Trend Index (CTI): The underlying premise of the CTI is that the market, as measured by the Dow Jones Industrial Average (DJIA), tends to move in cycles that often resemble sine waves. There are five identifiable cycles, each with different time durations at work in the market at all times.
Currently, the CTI is Negative at -10, down a notch from the previous week. Cycles A, B, C, and D are bearish, while Cycle E is bearish. The CTI is projected to remain in negative territory through July. At that time we will see a reset of the different cycles that should lead to a resumption of the bull market into the fall.
Momentum Index (MI): The markets momentum is measured by comparing the strength or weakness of several broad market indexes to the DJIA. Readings of -4 and lower are regarded as bearish since it is an indication that a majority of the broader based market indexes are weaker than the DJIA on a percentage basis. Conversely, readings of +4 or higher are regarded as bullish.
The Momentum Index is Neutral at -3, down a notch from the previous week. Breadth was mixed at the NYSE as the Advance/Decline line lost 3684 units while the number of new 52-week highs out did the new lows on all five sessions. Breadth was negative at the NASDAQ as the A/D line dropped 6859 units while the number of new lows beat the new highs on three days. Finally, the percentage of stocks above their 50-day moving average slipped to 36.9% vs. 38.8% the previous week, while those above their 200-day moving average fell to 75.7% vs. 77.3%. Readings above 70.0% denote an overbought condition, while below 20% is bullish.
Sentiment Index (SI): Measuring the market’s Bullish or Bearish sentiment is important when attempting to determine the markets future direction. Market Edge tracks thirteen technical indicators listed below that measure excessive bullish or bearish sentiment conditions prevalent in the market. In addition, we track money flows into and out of Equity Funds and ETFs which as of 7/14/21 shows inflows of $628 million. Currently, the Sentiment Index is Negative at -3, unchanged from the previous week.
Market Posture: Based on the status of the Market Edge, market timing models, the Market Posture is Bearish as of the week ending 6/18/2021 (DJIA ñ 33290.08). For a closer look at the technical indicators and studies that make up the market timing models, check out the tables located below.
| Market Timing Models | Current Reading | Prior Week | Connotation | ||||||
| Cyclical Trend Index (CTI): | -10 | -9 | Negative | ||||||
| Momentum Index: | -3 | -2 | Neutral | ||||||
| Sentiment Index: | -3 | -3 | Negative | ||||||
| Strength Index – DJIA (DIA): | 51.7 | 31.0 | Positive | ||||||
| Strength Index – NASDAQ 100 (QQQ): | 64.6 | 56.3 | Positive | ||||||
| Strength Index – S&P 100 (OEX): | 46.2 | 28.0 | Negative | ||||||
| Dow Jones Industrial Average (DJIA): | 34687.85 | 34870.16 | -0.5% | ||||||
| S&P 500 Index: | 4327.16 | 4369.55 | -1.0% | ||||||
| NASDAQ Composite Index: | 14427.24 | 14701.92 | -1.9% | ||||||
| *Connotation is Positive or Negative Divergence from the DJIA | |||||||||
Ask Mr. Seifert
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